Open international capital markets have been instrumental in efficiently allocating risk and allowing firms to fulfill their capital investment demand. Also, systematic and credit risk measures may affect business investment through multiple channels. First, changes in market interest rates imply changes in the cost of capital, which in turn affect investment; the so-called interest channel. Second, changes in market interest rates affect the net cash flow available to a firm.
Given imperfect capital markets, the availability of net cash flow will have an effect on investment. This is generally referred to as the broad credit channel. However, many other linkages exist between monetary conditions and real investment. Interest rate levels, risk measures such as banking spreads and monetary policy signal-to-noise ratios, contagion, leverage and liquidity effects are closely related to monetary policy activity and variability, and those measures can affect real investment.
In terms of publicly traded companies, real investment funds are not bounded by local stock markets but also include the possibility of firms seeking funds abroad by cross-listing in foreign stock exchanges. In this paper, we use firm-level data in 29 countries of cross-listing origin over a six year period, from 2000 to 2005 to study the effects of nominal variables on firm value and the firm’s decision to cross-list abroad. The evidence in this paper is based on firms cross-listed in a major North-American, Asian and European market. Table 1 shows top exchanges by total share trading value where the U.S. markets in 2006 ranked first and second.
This paper explores an empirical mechanism of monetary policy on the value of firms and thus real investment through interest rate channels. We consider the nominal interest rate level effects, the financial intermediation risk (measured by the banking interest rates spread) and systematic risk measures of monetary policy such as the signal-to-noise ratio of interest rates. There is also a literature that examines the premium in market value of firms that cross list abroad.
In particular, Doidge et al (2004, 2009) provide evidence that cross listing in the United States stock exchange provides a significant premium in firm’s market value; see also Bianconi and Tan (2010). They attribute that premium to higher standards of corporate governance in the US. This evidence led us to seek measures of US monetary policy and others risk measures as benchmarks for the valuation of publicly traded firms around the world, and a potential important measure for firms that cross-list abroad.
Hence, in addition to local measure of interest rates spread, we also include U.S. interest rates spread and signal to-noise ratio in interest rates as a benchmark. We find consistent and robust empirical evidence that the US market risk given by the federal funds rate signal-to-noise ratio (in the Sharpe sense) provides an important benchmark for firm value across the world of publicly traded companies.
